What is WACC?
Answers:
Weighted Average Cost of Capital
WACC = [E / (E + D)] * [Rf + Beta (Rm - Rf)] + [D / (E + D)] * Rd (1 - Tc)
E = Value of equity
D = Value of Debt
Rf = Risk free rate (10 yr treasury yield)
Beta = Company Beta
Rm = Expected market return (12% is a good benchmark)
Rd = Rate on company debt
Tc = Marginal tax rate for the company
or
WACC = [(cost of equity + cost of debt) / (value of equity + value of debt)] x 100
A company needs to earn a return on capital greater than the WACC in order to create value.
If your WACC is greater than your Return on Capital you are destroying value (borrowing at a higher rate than you can earn on investing - like borrowing money at 9% to invest at 4% - doesn't make sense)
Weighted Average Cost Of Capital - WACC
A calculation of a firm's cost of capital in which each category of capital is proportionately weighted. All capital sources - common stock, preferred stock, bonds and any other long-term debt - are included in a WACC calculation.
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